China And Iran To Bypass Dollar, Plan Oil Barter System, And A Deeper Dive Into The Iranian Oil Bourse

One of the more notable events in the past week was the previously discussed reopening of the Iranian Oil Bourse, an attempt by Iran to launch a venue that bypasses US sanctions against Iran which has prevented payment in the world's reserve currency for Iranian goods. "Big deal", some will say, this is not the first time Iran has attempt to upstage the Great Satan. Well, true, although as OilPrice said last week, "what it would take for Iran’s new exchange to survive and flourish are some heavy-duty customers that Washington would be wary of picking a fight with, and Tehran already has one – China... China, the world's largest buyer of Iranian crude oil, has renewed its annual import pacts for 2011. In 2010 Iran supplied about 12 percent of China's total crude imports. According to the latest report of the China Customs Organization, Iran's total oil exports to China stood at 8.549 million tons between January and April 2011, up 32 percent compared with the same period last year. Iran is currently China's third largest supplier of crude oil, providing China with nearly one million barrels per day." Still, the perceived provocation to Uncle Sam should China go ahead and slap America in the face by accepting the existence of the Kish exchange, would echo around the world. Which is why many don't think much if anything will happen. Until today, that is: according to the FT, China has decided to commence an barter system in which Iranian oil is exchanged directly for Chinese exports. The net result: not only a slap for the US Dollar, but implicitly for all fiat intermediaries, as Iran and China are about to prove that when it comes to exchanging hard resources for critical Chinese goods and services, the world's so called reserve currency is completely irrelevant. The implications of this are momentous, especially for US debt, whose indomitability is only predicated upon the continued acceptance of the currency it backs as a global reserve. If China is now openly admitting to the world that it does not need US monetary intermediation, and by implication, the "debt" backing said intermediation, what then? And who will follow China next?

Tehran and Beijing are in talks about using a barter system to exchange Iranian oil for Chinese goods and services, as US financial sanctions have blocked China from paying at least $20bn for oil imports.

The US sanctions against Iran, which make it extremely difficult to conduct dollar-denominated business, mean that China could owe the oil-rich nation as much as $30bn, according to people familiar with the problem.

They said the unpaid oil bills had built up over the past two years and the governments, which are in early-stage talks, were looking at how to “offset” the debt.

Some Iranian officials are growing increasingly angry about the inability of the country’s largest oil customers to pay cash, a problem that has contributed to a shortage of hard currency and has hindered the central bank from defending the Iranian rial, which has been sharply devalued over the past month.

China and India together buy about one-third of Iran’s oil, the country’s economic lifeblood. China’s oil imports from Iran have risen 49 per cent this year, according to Reuters.

While Iran can do without India, it needs China:

Iran last week threatened to cut off oil exports to India, which owes $5bn for oil but has not been able to move the money out of an escrow account to Tehran.

Unlike India, which exports almost nothing to Iran, China is dominant in Iranian business and could use a barter system to balance trade between the two countries. Beijing is involved in everything from building tunnels to exporting toys and has been expanding into Iran’s oil sector, where European companies such as Shell and Total have been deterred by the difficulties of operating without contravening sanctions.

China and Iran’s bilateral trade totaled $29.3bn last year, up almost 40 per cent from 2009. The two countries this month signed several infrastructure and trade collaboration agreements that would see Chinese companies invest in big infrastructure projects in Iran, while Iran would export large quantities of chrome ore to China, according to local reports.

“Both China and India are happy to keep Iran’s money in their banks and try to get Iran involved in barter deals to sell their junk, or give yuan and rupees instead of hard currencies,” said one Iranian former official, on condition of anonymity. Iran had not yet accepted the alternatives, he added.

While Iran would have very little use for a non-convertible Yuan (for now), direct barter is something that will be far more useful to the resource-rich country. Yet, as Isaac Newton once cautioned, "in order to measure, you must define your unit." What will China and Iran agree on as the unit of exchange, if not monetary intermediate, especially in those cases when there is no preset barter agreement?

If said neutral monetary "hard asset" ends up being a precious metal, look out US Dollar.

And for those curious to learn some more about the Iranian Oil Bourse, here is Grant Williams with his latest "Things that make you go hmmm."

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This isn't exactly the doomsday scenario its painted to be above. If you read the FT article, the Iranians are not delerious about the trade deal with China. Here is what one Iranian official was quoted as saying, in the FT article -

“Both China and India are happy to keep Iran’s money in their banks and try to get Iran involved in barter deals to sell their junk, or give yuan and rupees instead of hard currencies,” said one Iranian former official, on condition of anonymity. Iran had not yet accepted the alternatives, he added."

So the deal does not appear to even be done, yet. And even if it is, its a big disappointment for Iran. Why not get gold for oil?

Correctomundo...what fool country would the Iranians trade their Chinese crap to in order to purchase goods their people actually want and can afford? China's already sold that same crap to Iran's potential buyers. I smell desperation in Terhan, the desperation of those ignorant of econ 101.

Lol, what would the Chinese do? They are - simply put - poor and weak.

In America, we have a very high-IQ (120+) and healthy population, solid principles and motivations, an incredibly strong economy (despite what all the doomers say), and high-grade equipment and technology.

WWIII, if it happens, will only result in the complete annihilation of the Yellows.

CD, I believe this decade of 07/17 will be noted as well. The global connected failures being propped up killing one of the most important cores of capitalism (failed business fails) will be the number one topic of economic classes and the primary driver in the creation of a different type of economic system based on something like thermodynamics.

Every time I pass a WalMart, I bi-pass China. My curiousity about what the markets are going to do tonight is killin' me. I snicker and think many ZH's are in the same boat. ZH is a great place to go when a storm is about to hit; best weather reports anywhere.